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surreal moment for America

Lukey

Senator
I understand it quite well. I've done some of this stuff for a living, negotiating ISDAs and working on large M&A transactions where tiny differences in interest rates can make millions of dollars of difference. The world looks different out here in the real world than it does in the airless echo chamber of Zero Hedge. That's why Zero Hedge and those who rely on it keep being so very, very wrong in their predictions, year after year.
If that were true you wouldn't make a patently absurd point like "rates are low because of the 'demand' for treasuries." It is, of course, a completely manipulated market, which means "supply and demand," in this context, is irrelevant.
 

Arkady

President
If that were true you wouldn't make a patently absurd point like "rates are low because of the 'demand' for treasuries." It is, of course, a completely manipulated market, which means "supply and demand," in this context, is irrelevant.
It is true. Have you considered the possibility you simply have been misled by politically-motivated propaganda, coming from a crew of propagandists who just keep being proven wrong by real-world events? As for "supply and demand," part of the market demand is from foreign central banks. You may consider that illegitimate, but it's part of the market and your distaste for it doesn't matter.
 

Lukey

Senator
It is true. Have you considered the possibility you simply have been misled by politically-motivated propaganda, coming from a crew of propagandists who just keep being proven wrong by real-world events? As for "supply and demand," part of the market demand is from foreign central banks. You may consider that illegitimate, but it's part of the market and your distaste for it doesn't matter.
Yeah, it's the free market keeping rates at the zero bound for the past 70 months. Do you even reread your posts before you hit "send?" That is the most patently absurd comment on the economy and/or markets I have ever heard. Government spending is NOT "demand" - nor "investment" for that matter. It is quite simply manipulation always and everywhere.
 

Arkady

President
Yeah, it's the free market keeping rates at the zero bound for the past 70 months. Do you even reread your posts before you hit "send?" That is the most patently absurd comment on the economy and/or markets I have ever heard. Government spending is NOT "demand" - nor "investment" for that matter. It is quite simply manipulation always and everywhere.
You're confusing the federal funds rate with the interest rates on Treasuries.
 

Lukey

Senator
One influences the other, but they aren't locked. For example, the target Federal Funds rate hasn't budged in years, while treasury rates have continued to move.
Yeah:

Screen Shot 2015-10-22 at 1.00.24 PM.png
There's obviously no correlation. And I'm sure this is completely a "market determined rate:"

http://www.zerohedge.com/news/2015-10-22/wtf-chart-day-italian-2y-bond-yields-collapse-below-zero-first-time-ever

If you had any credibility left, suggesting that the bond market (interest rates) is being run on supply and demand should put a big effing hole in it...
 

Arkady

President
Yeah:

View attachment 28371
There's obviously no correlation. And I'm sure this is completely a "market determined rate:"

http://www.zerohedge.com/news/2015-10-22/wtf-chart-day-italian-2y-bond-yields-collapse-below-zero-first-time-ever

If you had any credibility left, suggesting that the bond market (interest rates) is being run on supply and demand should put a big effing hole in it...
As is your custom, you're trying to debate a point that nobody's made: that there's no correlation. If you'll go back, you'll see that I said the opposite -- that, in fact, one influences the other. I simply pointed out that they weren't locked. As is so often the case, you helped out by posting a chart confirming my point. In your chart, the federal funds rate has been essentially unchanged for almost seven years, and yet the yield on the 10-year treasury has bounced up and down.

Specifically, the target Federal Funds rate has been an identical 0%-0.25% (they set a high and low limit) ever since December 2008, while the 10-year treasury has ranged between 3.85% and 1.53%. In other words, even with a constant Federal Funds target, Treasury rates can more than double, or fall by more than half.
 

Days

Commentator
I understand it quite well. I've done some of this stuff for a living, negotiating ISDAs and working on large M&A transactions where tiny differences in interest rates can make millions of dollars of difference. The world looks different out here in the real world than it does in the airless echo chamber of Zero Hedge. That's why Zero Hedge and those who rely on it keep being so very, very wrong in their predictions, year after year.
Yeah, well, you totally missed the mark on your post... trying to deny banks buy Treasuries for asset/reserve. You can rattle off your credit mantra all you want for home mortgages (and commercial mortgages) it doesn't mean anything in context to why commercial banks buy Treasuries. I think you have a good grip on how credit works, but that isn't the subject. Banks can use Treasury rates as a base or they can use LIBOR (London InterBank Overseas Rate) and then they add a margin to make profit, and yes, you have to qualify for that loan with impeccable credit... but none of that explains why the bank bought the Treasury. Banks buy Treasuries, I should say used to buy Treasuries, as part of the carry trade, okay, that would justify staring at interest rates, but that isn't happening right now and hasn't been happening since Obama took office for his first term. But what has always happened, and it was tightened down, is the requirement to hold bonds in asset/reserve for at least 10% of your lending. Everyone was lending 30 to 40 times their assert/reserve during the bubble ... when it popped, the FED made them fix their cash levels and their asset/reserve.

Then I also mentioned the intl oil trade. I posted that central banks all over the world hold Treasuries at the NYFED in asset/reserve in order to buy oil. And you come back with some kind of nut response that doesn't refute what I'm saying but tries to play with the numbers and somehow claim it is wrong without saying how it is wrong. About those numbers: $18 Trillion - $5 Trillion in federal trust funds = $13 Trillion held by the private sector. $13 Trillion - $1 Trillion held by the FED QED2 program in 40 year bonds = $12 Trillion. Of those $12 Trillion, roughly half are held by foreign banks/corporations. That leaves about $6 Trillion floating in the US market, and yes some of that is held in personal savings bonds; but not of late, not since the rates dropped to nothing. In the past 5 years, the main reason our banks have bought Treasuries is to shore up their asset/reserve for lending. It sure as hell isn't the interest rate that is attracting them.
 

Days

Commentator
As is your custom, you're trying to debate a point that nobody's made: that there's no correlation. If you'll go back, you'll see that I said the opposite -- that, in fact, one influences the other. I simply pointed out that they weren't locked. As is so often the case, you helped out by posting a chart confirming my point. In your chart, the federal funds rate has been essentially unchanged for almost seven years, and yet the yield on the 10-year treasury has bounced up and down.

Specifically, the target Federal Funds rate has been an identical 0%-0.25% (they set a high and low limit) ever since December 2008, while the 10-year treasury has ranged between 3.85% and 1.53%. In other words, even with a constant Federal Funds target, Treasury rates can more than double, or fall by more than half.
they are not locked into each other, obviously, why would the interest rate on a benchmark 10 year Treasury be locked into the target rate for Federal Funds? The Federal Funds rate is what the FED charges when they loan money to banks... it is the cost of our synthetic money dujour. Meanwhile the ten year Treasury rate is the standard used for mortgage rates on 30 year loans. Two different instruments used for two different products in two different markets. Certainly not locked into each other, but definitely both are in tune to the same economy. So there is a great big correlation.

When the target rates for lending money to banks and lending for real estate mortgages are both right around zero... that's called a financial collapse. The nation's economic engine has died. Inflating the money supply to create a synthetic "growth" of 1-2% is a smoke and mirrors act. All we've done under Obama is print up more money and use it to buy up the same stocks at higher prices. This isn't true growth, it is just another stock bubble, and as such, it will collapse again.

Look at Lukey's chart. See the blue line? That's the benchmark rate for 30 year loans. 4% is the low water mark. Eisenhower's 2nd term was prosperous to the point where no one wanted Treasuries, they stopped holding auctions because no one was buying. That's called a low water mark in the industry. when it fell below 4%, we were freaking out in the mortgage industry, when it fell to 3% in 2009, I quit the industry altogether. Now it is around 2%. That says something about the economy, it says that the banks have no loans, that they are buying Treasuries out of desperation, it is the new carry trade; not to make money on interest rate, but just to have money, period.
 

Arkady

President
Yeah, well, you totally missed the mark on your post... trying to deny banks buy Treasuries for asset/reserve.
If you think I tried to deny that, I'd recommend you go back and reread. What part of what I said, specifically, did you see as a denial that banks buy Treasuries for asset/reserve? The point I made is that if they're buying the Treasuries at a given rate, as partial reserve on money they'd like to lend, then the risk associated with those Treasuries goes into their calculus. They're accounting for the risk of default and devaluation. If they ascribed a high risk of either, then either they wouldn't do more loans, given the cost of buying that junk, or at least they'd lend at high rates, to offset for the risk of loss in the reserves. Right now, they're lending at some of the lowest rates in modern history.

And you come back with some kind of nut response that doesn't refute what I'm saying but tries to play with the numbers and somehow claim it is wrong without saying how it is wrong.
You didn't understand the response. I'd urge you to reread. My point was that they are not required to hold dollars or treasuries to trade in oil. They could hold other currencies and other countries' debt instead, if they wanted, and occasionally that happens. Most opt for the dollar and US debt because, on balance, it offers the most advantages to do so. But, again, that suggests they're ascribing to those assets low risk, or they'd be warier about being stuck holding the bag.

It sure as hell isn't the interest rate that is attracting them.
Actually, if the interest rate were zero, you'd do better just to hold actual cash... there'd be no transaction cost or delay associated with liquidating it. The interest rate on Treasuries may be small, but when you're talking about billions of dollars, it's meaningful, and factors into the decision to hold Treasuries. However, it's true that the interest rate isn't very attractive at the moment. What's attractive is that, relative to nearly every other asset, it's seen as safe. It's similar to the very low interest rates on debt of several other large, wealthy nations -- even those without reserve status. For example, the UK's debt recently touched an all-time low interest rate. That's not because companies need British Pounds to buy and sell oil, and so on. It's because it's seen as a safe investment, albeit a low-earning one.
 

Days

Commentator
If you think I tried to deny that, I'd recommend you go back and reread. What part of what I said, specifically, did you see as a denial that banks buy Treasuries for asset/reserve? The point I made is that if they're buying the Treasuries at a given rate, as partial reserve on money they'd like to lend, then the risk associated with those Treasuries goes into their calculus. They're accounting for the risk of default and devaluation. If they ascribed a high risk of either, then either they wouldn't do more loans, given the cost of buying that junk, or at least they'd lend at high rates, to offset for the risk of loss in the reserves. Right now, they're lending at some of the lowest rates in modern history.



You didn't understand the response. I'd urge you to reread. My point was that they are not required to hold dollars or treasuries to trade in oil. They could hold other currencies and other countries' debt instead, if they wanted, and occasionally that happens. Most opt for the dollar and US debt because, on balance, it offers the most advantages to do so. But, again, that suggests they're ascribing to those assets low risk, or they'd be warier about being stuck holding the bag.


Actually, if the interest rate were zero, you'd do better just to hold actual cash... there'd be no transaction cost or delay associated with liquidating it. The interest rate on Treasuries may be small, but when you're talking about billions of dollars, it's meaningful, and factors into the decision to hold Treasuries. However, it's true that the interest rate isn't very attractive at the moment. What's attractive is that, relative to nearly every other asset, it's seen as safe. It's similar to the very low interest rates on debt of several other large, wealthy nations -- even those without reserve status. For example, the UK's debt recently touched an all-time low interest rate. That's not because companies need British Pounds to buy and sell oil, and so on. It's because it's seen as a safe investment, albeit a low-earning one.
Your point about holding cash versus buying savings bonds for the average citizen is spot on. That's why I said no one is holding (read: buying) savings bonds in the past 5 years.

I'm pretty sure OPEC still requires reserves in dollars to trade with them.
 

Lukey

Senator
As is your custom, you're trying to debate a point that nobody's made: that there's no correlation. If you'll go back, you'll see that I said the opposite -- that, in fact, one influences the other. I simply pointed out that they weren't locked. As is so often the case, you helped out by posting a chart confirming my point. In your chart, the federal funds rate has been essentially unchanged for almost seven years, and yet the yield on the 10-year treasury has bounced up and down.

Specifically, the target Federal Funds rate has been an identical 0%-0.25% (they set a high and low limit) ever since December 2008, while the 10-year treasury has ranged between 3.85% and 1.53%. In other words, even with a constant Federal Funds target, Treasury rates can more than double, or fall by more than half.
But the general correlation is clearly evident. Yes, actual note and bond rates bounce around, based on expectations of future moves in the Fed Funds Rate and/or QE (which, in case you haven't noticed is a direct effort by CBs to affect the direction of longer term rates).

Your point was that rates are currently being determined by supply/demand, remember? That is precisely what you suggested. I merely pointed out how absurd that notion was...
 

Arkady

President
But the general correlation is clearly evident. Yes, actual note and bond rates bounce around, based on expectations of future moves in the Fed Funds Rate and/or QE (which, in case you haven't noticed is a direct effort by CBs to affect the direction of longer term rates).

Your point was that rates are currently being determined by supply/demand, remember? That is precisely what you suggested. I merely pointed out how absurd that notion was...
Clearly the changes in the rate we've been seeing since the end of 2008 haven't been due to any changes in the target federal funds rate, since there hasn't been any. So, what has been driving those changes? We're talking about pretty substantial variation -- the high rate for treasuries in that time is 2.52 times the low rate. What's pushing rates so far up and down? There's a pretty simple explanation if the supply and demand have been varying in relation to each other . But if you're ruling out supply and demand as an explanation, what's doing it?
 

Days

Commentator
Clearly the changes in the rate we've been seeing since the end of 2008 haven't been due to any changes in the target federal funds rate, since there hasn't been any. So, what has been driving those changes? We're talking about pretty substantial variation -- the high rate for treasuries in that time is 2.52 times the low rate. What's pushing rates so far up and down? There's a pretty simple explanation if the supply and demand have been varying in relation to each other . But if you're ruling out supply and demand as an explanation, what's doing it?
I told you, its the new carry trade. Demand has collapsed from the free market economy. There is a different demand now. We live in desperate times and this can only be termed "desperation demand". The banks have no where else to turn to create money.

The Obama recovery consists of large corporations using their rising stock income to put on experts in their field. It has provided new jobs at the top of the pyramid. Meanwhile, the broad middle class graduating with bachelor degrees can't find work.

This is an artificial recovery, created purely through printing money. What are we building? Nothing. Its another bubble, and its going to be the next bubble to collapse.
 
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Arkady

President
I told you, its the new carry trade. Demand has collapsed from the free market economy. There is a different demand now. We live in desperate times and this can only be termed "desperation demand". The banks have no where else to turn to create money.

The Obama recovery consists of large corporations using their rising stock income to put on experts in their field. It has provided new jobs at the top of the pyramid. Meanwhile, the broad middle class graduating with bachelor degrees can't find work.

This is an artificial recovery, created purely through printing money. What are we building? Nothing. Its another bubble, and its going to be the next bubble to collapse.
I agree with you that it's supply and demand. As for the idea that it's an artificial recovery, I'm not following your reasoning there. Real GDP per capita is up. We're producing more value per person than we were before. If that's because there's more money in circulation, helping to get the economic ball rolling again, fine. So what? If there were more money but not more goods and services being produced, that would mean inflation. But, as you know, inflation has remained near-record lows for years now.
 

Days

Commentator
I agree with you that it's supply and demand. As for the idea that it's an artificial recovery, I'm not following your reasoning there. Real GDP per capita is up. We're producing more value per person than we were before. If that's because there's more money in circulation, helping to get the economic ball rolling again, fine. So what? If there were more money but not more goods and services being produced, that would mean inflation. But, as you know, inflation has remained near-record lows for years now.
If there was more money circulating through the entire economy but not more goods and services being produced, that would mean inflation. But as we know, trickle down doesn't work, and this economy is raw proof that it doesn't work. College graduates can't even find a job in their field, they are working as labor trying to pay off their college loans. Inflation sure isn't happening. What we are looking at is a stock bubble inside of a Treasury bubble. When they pop the stock bubble, it could pop the Treasury bubble.

When they said the housing bubble will pop, I wrote "housing bubbles are made out of concrete, this won't pop" ... I was wrong. We are seeing the entire infrastructure of our nation deteriorating before our eyes.
 

Lukey

Senator
I agree with you that it's supply and demand. As for the idea that it's an artificial recovery, I'm not following your reasoning there. Real GDP per capita is up. We're producing more value per person than we were before. If that's because there's more money in circulation, helping to get the economic ball rolling again, fine. So what? If there were more money but not more goods and services being produced, that would mean inflation. But, as you know, inflation has remained near-record lows for years now.
Yes, it's "supply and demand" with a completely manipulated "supply" and, er..."demand."

The idea that FREE MARKET style "supply and demand" is keeping rates as low as they are is absurd. You keep telling us we are recovering, yet the risk free rate remains zero bound and longer term rates keep dropping:

Screen Shot 2015-10-23 at 2.49.43 PM.png

One of them is a lie. Which one is it?
 

Arkady

President
We are seeing the entire infrastructure of our nation deteriorating before our eyes.
That brings me to a related topic. We had such an easy opportunity to address our deteriorating infrastructure in the aftermath of the crisis. We had borrowing costs that were so low they literally went negative in real terms -- we could have paid back less value than we borrowed. And we had lots of unused economic capacity sitting idle, including huge number of unemployed people. All we needed to do is borrow and use the money to hire up people to maintain and improve our infrastructure, with direct government employment programs along the lines of what we had during the New Deal.

That would have gotten the economy growing robustly again, it would have decreased our long-term costs (an ounce of prevention being worth a pound of cure), and it would have enhanced our long-term economic potential, while making it more ecologically sustainable. Best of all, it would have meant that the generation of kids who spent the last seven years sitting in their parents' basement playing XBox and hoping to hear back on one of their resume submissions would instead have spent that time developing a work ethic, in-demand skills, connections, and a solid track record to attract employers.

Sadly, we listened to the mindless panic of the anti-deficit crowd, who insisted on premature fiscal austerity, screwing us over. We had a once-per-century opportunity to take a huge leap ahead -- we could have exited the crisis early, with the best infrastructure and best-skilled workforce of any major wealthy nation, and instead we've lingered in a depressed state while our infrastructure deteriorates and a generation of young workers loses the expectation that they should be employed.
 

Arkady

President
Yes, it's "supply and demand" with a completely manipulated "supply" and, er..."demand."

The idea that FREE MARKET style "supply and demand" is keeping rates as low as they are is absurd. You keep telling us we are recovering, yet the risk free rate remains zero bound and longer term rates keep dropping:

View attachment 28385

One of them is a lie. Which one is it?
Since I think the free market is largely a figment of the imagination, the distinction doesn't matter to me. Every market is influenced by governmental regulations and a role for the government as a market participant.
 
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